Senate File 2302 SENATE FILE BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO SSB 3171) Passed Senate, Date Passed House, Date Vote: Ayes Nays Vote: Ayes Nays Approved A BILL FOR 1 An Act relating to tax credits for investments in certain 2 qualifying businesses and community=based seed capital funds 3 and providing for retroactive applicability. 4 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 5 TLSB 6927SV 80 6 tm/gg/14 PAG LIN 1 1 Section 1. Section 15E.42, subsection 3, Code Supplement 1 2 2003, is amended to read as follows: 1 3 3. "Investor" meansan individuala person making a cash 1 4 investment in a qualifying business oran individual taxed on 1 5 income from a revocable trust's cash investment in a 1 6 qualifying business or a person making a cash investmentin a 1 7 community=based seed capital fund. "Investor" does not 1 8 include a personwhich is a current or previousthat holds at 1 9 least a seventy percent ownership interest as an owner, 1 10 member, or shareholder in a qualifying business. 1 11 Sec. 2. Section 15E.43, subsection 1, paragraphs a and b, 1 12 Code Supplement 2003, are amended to read as follows: 1 13a. For tax years beginning on or after January 1, 2002, a 1 14 tax credit shall be allowed against the taxes imposed in 1 15 chapter 422, division II, for a portion of an individual 1 16 taxpayer's equity investment, as provided in subsection 2, in 1 17 a qualifying business. An individual shall not claim a tax 1 18 credit under this paragraph of a partnership, limited 1 19 liability company, S corporation, estate, or trust electing to 1 20 have income taxed directly to the individual. However, an 1 21 individual receiving income from a revocable trust's 1 22 investment in a qualified business may claim a tax credit 1 23 under this paragraph against the taxes imposed in chapter 422, 1 24 division II, for a portion of the revocable trust's equity 1 25 investment, as provided in subsection 2, in a qualified 1 26 business.1 27 b. For tax years beginning on or after January 1, 2002, a 1 28 tax credit shall be allowed against the taxes imposed in 1 29 chapter 422, divisions II, III, and V, and in chapter 432, and 1 30 against the moneys and credits tax imposed in section 533.24, 1 31 for a portion of a taxpayer's equity investment, as provided 1 32 in subsection 2, in a qualifying business or a community=based 1 33 seed capital fund. An individual may claim a tax credit under 1 34 this paragraph of a partnership, limited liability company, S 1 35 corporation, estate, or trust electing to have income taxed 2 1 directly to the individual. The amount claimed by the 2 2 individual shall be based upon the pro rata share of the 2 3 individual's earnings from the partnership, limited liability 2 4 company, S corporation, estate, or trust. 2 5 Sec. 3. Section 15E.44, subsection 4, Code Supplement 2 6 2003, is amended to read as follows: 2 7 4. After verifying the eligibility of a qualifying 2 8 business, the board shall issue a tax credit certificate to be 2 9 attached to the equity investor's tax return. The tax credit 2 10 certificate shall contain the taxpayer's name, address, tax 2 11 identification number, the amount of credit, the name of the 2 12 qualifying business, and other information required by the 2 13 department of revenue. The tax credit certificate, unless 2 14 rescinded by the board, shall be accepted by the department of 2 15 revenue as payment for taxes imposed pursuant to chapter 422, 2 16divisiondivisions II, III, and V, and in chapter 432, and for 2 17 the moneys and credits tax imposed in section 533.24, subject 2 18 to any conditions or restrictions placed by the board upon the 2 19 face of the tax credit certificate and subject to the 2 20 limitations of section 15E.43. 2 21 Sec. 4. Section 15E.45, subsection 2, paragraphs b and c, 2 22 Code Supplement 2003, are amended to read as follows: 2 23 b. The fund has, on or after January 1, 2002, a total of 2 24 both capital commitments from investors and investments in 2 25 qualifying businesses of at leastfiveone hundred twenty=five 2 26 thousand dollars, but not more than three million dollars. 2 27 c. The fund has no fewer thantenfive investors who are 2 28 not affiliates, with no single investor and affiliates of that 2 29 investor together owning a total of more than twenty=five 2 30 percent of the ownership interests outstanding in the fund. 2 31 Sec. 5. Section 15E.45, subsection 6, Code Supplement 2 32 2003, is amended to read a follows: 2 33 6. In the event that a community=based seed capital fund 2 34 fails to meet or maintain any requirement set forth in this 2 35 section, or in the event that the community=based seed capital 3 1 fund has not invested at least thirty=three percent of its 3 2 invested capital inno fewer than twoone or more separate 3 3 qualifying businesses, measured at the end of the thirty=sixth 3 4 month after commencing the fund's investing activities, the 3 5 board shall rescind any tax credit certificates issued to 3 6 limited partners or members and shall notify the department of 3 7 revenue that it has done so, and the tax credit certificates 3 8 shall be null and void. However, a community=based seed 3 9 capital fund may apply to the board for a one=year waiver of 3 10 the requirements of this subsection. 3 11 Sec. 6. Section 15E.51, subsection 4, Code Supplement 3 12 2003, is amended to read as follows: 3 13 4. A taxpayer shall not claim a tax credit under this 3 14 section if the taxpayer is a venture capital investment fund 3 15 allocation manager for the Iowa fund of funds created in 3 16 section 15E.65 or an investor that receives a tax credit for 3 17 the same investment in a qualifying business as described in 3 18 section 15E.44 or in a community=based seed capital fund as 3 19 described in section 15E.45. 3 20 Sec. 7. APPLICABILITY DATE. This Act applies 3 21 retroactively to January 1, 2004, for tax years beginning on 3 22 or after that date. 3 23 EXPLANATION 3 24 This bill relates to tax credits for investments in certain 3 25 qualifying businesses and community=based seed capital funds. 3 26 The bill amends the definition of "investor" to provide 3 27 that an investor is a person making a cash investment in a 3 28 qualifying business or in a community=based seed capital fund. 3 29 The bill also amends the exclusion to the definition of 3 30 "investor" to provide that the term "investor" does not 3 31 include a person that holds at least a 70 percent ownership 3 32 interest as an owner, member, or shareholder in a qualifying 3 33 business. 3 34 Currently, a tax credit is allowed against personal income 3 35 tax liability equal to a portion of an individual taxpayer's 4 1 equity investment in a qualifying business. The bill provides 4 2 that in addition to personal income tax liability, the tax 4 3 credit may be allowed against corporate income tax, the 4 4 franchise tax for financial institutions, the insurance 4 5 premium tax, and the moneys and credits tax for credit unions 4 6 for a portion of a taxpayer's equity investment in a 4 7 qualifying business. The bill makes conforming amendments. 4 8 The bill amends the criteria for community=based seed 4 9 capital funds. The bill provides that a fund must have no 4 10 fewer than five investors who are not affiliates. Current law 4 11 requires no fewer than 10 investors who are not affiliates. 4 12 The bill reduces the minimum required capital commitment from 4 13 investors and investments in qualifying businesses from 4 14 $500,000 to $125,000. 4 15 The bill amends a requirement that tax certificates shall 4 16 be rescinded and nullified by the Iowa capital investment 4 17 board if a community=based seed capital fund has not invested 4 18 at least 33 percent of its invested capital in no fewer than 4 19 two separate qualifying businesses, measured at the end of the 4 20 36th month after commencing the fund's investing activities. 4 21 The bill changes the two separate qualifying businesses 4 22 criteria to one or more separate qualifying businesses. 4 23 The bill applies retroactively to January 1, 2004, for tax 4 24 years beginning on or after that date. 4 25 LSB 6927SV 80 4 26 tm/gg/14